UK Equity Mutual Fund Alphas Make a Comeback

Abstract

In this study we re-visit the performance of 887 active UK equity mutual funds using a new approach proposed by Angelidis, Giamouridis and Tessaromatis (2013). The authors argue that mutual funds stock selection is driven by the benchmark index, so if the benchmark generates alpha, there will be a bias in interpretation of manager’s stock picking ability. In their model, alpha of a fund is adjusted by benchmark’s alpha. By applying this method, we eliminate bias inflicted by the persistently negative alphas of FTSE 100 index in the period 1992-2013. We find that adjusted Fama-French and Carhat alphas of UK equity mutual funds are higher than those implied by the standard three and four factor models and overall positive, contrary to most of the existing literature on UK fund performance. This result is consistent across funds’ investment styles and robust to use of FTSE Small Cap as benchmark for a subsample of small cap funds.

Keywords: Fama-French, Carhart, adjusted alphas, UK equity funds performance

JEL Classification: G11, G12, G23